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Demographic forecasts and fiscal policy rules

Author

Listed:
  • Lassila, Jukka
  • Valkonen, Tarmo
  • Alho, Juha M.

Abstract

All quantitative evaluations of fiscal sustainability that include the effects of population ageing must utilize demographic forecasts. It is well known that such forecasts are uncertain, and some studies have taken that into account by using stochastic population projections jointly with economic models. We develop this approach further by introducing regular demographic forecast revisions that are embedded in stochastic population projections. This allows us to separate, for each demographic outcome and under different policy rules, the expected and realized effects of population ageing on public finances. In our Finnish application, demographic uncertainty produces a considerable sustainability risk. We consider policies that reduce the likelihood of getting highly indebted and demonstrate that, although demographic forecasts are uncertain, they contain enough information to be useful in forward-looking policy rules.

Suggested Citation

  • Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2014. "Demographic forecasts and fiscal policy rules," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1098-1109.
  • Handle: RePEc:eee:intfor:v:30:y:2014:i:4:p:1098-1109
    DOI: 10.1016/j.ijforecast.2014.02.009
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    References listed on IDEAS

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    1. Alho, Juha M. & Hougaard Jensen, Svend E. & Lassila, Jukka & Valkonen, Tarmo, 2005. "Controlling the effects of demographic risks: the role of pension indexation schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 139-153, July.
    2. Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters,in: Social Security Policy in a Changing Environment, pages 43-68 National Bureau of Economic Research, Inc.
    3. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
    4. Ronald D. Lee & Michael W. Anderson & Shripad Tuljapurkar, 2003. "Stochastic Forecasts of the Social Security Trust Fund," Working Papers wp043, University of Michigan, Michigan Retirement Research Center.
    5. Jukka Lassila & Tarmo Valkonen, 2004. "Pre-funding Expenditure on Health and Long-term Care under Demographic Uncertainty," The Geneva Papers on Risk and Insurance, The International Association for the Study of Insurance Economics, vol. 29(4), pages 620-639, October.
    6. Jukka Lassila & Tarmo Valkonen, 2007. "The Finnish Pension Reform of 2005," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 32(1), pages 75-94, January.
    7. Nico Keilman, 2008. "European Demographic Forecasts Have Not Become More Accurate Over the Past 25 Years," Population and Development Review, The Population Council, Inc., vol. 34(1), pages 137-153.
    8. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-241, May.
    9. Alho, Juha M., 2014. "Forecasting demographic forecasts," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1128-1135.
    10. John Creedy & Grant M Scobie, 2002. "Population Ageing and Social Expenditure in New Zealand: Stochastic Projections," Treasury Working Paper Series 02/28, New Zealand Treasury.
    11. Dr Martin Weale, 2005. "Fiscal implications of demographic uncertainty for the UK," National Institute of Economic and Social Research (NIESR) Discussion Papers 250, National Institute of Economic and Social Research.
    12. Alho, Juha M. & Vanne, Reijo, 2006. "On predictive distributions of public net liabilities," International Journal of Forecasting, Elsevier, vol. 22(4), pages 725-733.
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    Cited by:

    1. Lassila, Jukka, 2018. "Aggregate Risks, Intergenerational Risk-Sharing and Fiscal Sustainability in the Finnish Earnings-Related Pension System," ETLA Working Papers 57, The Research Institute of the Finnish Economy.
    2. Balamatsias, Pavlos, 2018. "Democracy and government spending," MPRA Paper 84975, University Library of Munich, Germany.
    3. David C. Lane & Özge Pala & Yaman Barlas & Willem L. Auping & Erik Pruyt & Jan H. Kwakkel, 2015. "Societal Ageing in the Netherlands: A Robust System Dynamics Approach," Systems Research and Behavioral Science, Wiley Blackwell, vol. 32(4), pages 485-501, July.
    4. Alho, Juha M., 2014. "Forecasting demographic forecasts," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1128-1135.
    5. Määttänen, Niku & Alho, Juha, 2014. "Response to updated mortality forecasts in life cycle saving and labor supply," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1120-1127.

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